Instacart Bets the Market Is Ripe Again for Grocery Delivery

Instacart CEO Apoorva Mehta submitted an interesting application to get into startup acclerator Y Combinator. Instead of going through the normal process, he used his grocery delivery service startup to send the partners beer—a month after the program’s spring 2012 term had started. It worked. The company was admitted.

Apoorva had founded Instacart at the end of May 2012, after spending a couple of years at Amazon. He didn’t particularly like what Amazon’s grocery service Fresh had to offer, but he also hated shopping, and he knew there was room for better options. “I don’t like going to the grocery store,” he says. “I never had the time or the motivation.”

Companies had tried and failed to keep grocery delivery services afloat before. The specter of Webvan, the bankrupt casualty of the dotcom bust, loomed large. But as Mehta looked at the space, he realized that something had changed: the proliferation of smartphones made it possible to crowdsource labor. If he could create the software, he could have an army of shoppers using their phones to coordinate orders and deliver groceries from their own cars. He could cut out the costs of full time employment and expensive equipment, overhead that helped sink earlier services. “That model has shown it hasn’t worked by the Webvans of the world,” he says. “That was the point where I realized I had a fulfillment and logistics background, and now for the first time in history this was possible.”

When he started the company, he had an important question to answer. Grocery chains like Safeway already had their own online delivery services. What could he add to the market? Faster delivery and a better interface. Other services required that consumers schedule their food deliveries in advance; Instacart would promise one or two hour delivery, or allow their users to schedule drop-offs ahead of time. The company would create an a mobile-friendly website that made shopping more pleasurable. And Instacart would offer something Safeway never could—orders from multiple stores. “Sometimes you want frozen items from Trader Joe’s and Diet Cokes from Safeway,” Mehta says.

Instacart was also built so that buyers can leave their shoppers special notes—for example, that they want ripe avocados to make guacamole or how green they like their bananas. Shoppers are put through training—there is an actual slide in the trainees’ material about the ripeness of avocados—-and two tests, one of which is a practical exam in a grocery store. They also have to pass DMV and background checks.

“We pick people that would pick produce better than you would if you went to the store,” Mehta says. “They pay attention to detail, they’re responsible and punctual. All those factor into the training program.” And if an order is wrong, somehow—-wrong ripeness, missing yogurt—the company makes sure there’s an immediate redelivery. Often, Mehta says, the problem will stem from the fact that an item has a quality problem and shouldn’t have been shelved to begin with.

The company can’t keep track of changes in stores’ product prices, so Instacart charges its own prices on its site. It also charges a delivery fee of $3.99 for orders over $35, and a user’s first delivery is free. Delivery fees can also change based on sales the company is running; they often offer free delivery to orders over $70.

The most complicated part of building the company wasn’t tracking down personal shoppers or getting customers to use the site; it was building the back end. “Imagine the problem: we have three different moving parts,” Mehta says. “Demand, supply and inventory.” Instacart could get 100 orders for immediate demand in all parts of the city. Shoppers are working at different times of day, and all have different experience levels. And because Instacart has no relationship with the grocery stores themselves, they have no control over what kind of inventory will be available when a shopper goes to a given location to pick up groceries. “The most important thing we’ve built is the engine,” Mehta says.

Shopping at Instacart on the iPad

Instacart emerged from Y Combinator in August 2012, picked up cofounders Brandon Leonardo and Max Mullen, and now has 200 shoppers delivering groceries throughout the San Francisco Bay Area, with a new city expected to come online soon. They pick up goods from Safeway, Trader Joe’s, Whole Foods, and Costco, and also offer a cheaper alternative called Instacart Plus, which sources inventory from local discount stores (in San Francisco, for example, it’s a store called Foods Co.).

The company also picked up $2.3 million in seed funding from Khosla Ventures, Canaan Partners, and angel investor Alexis Ohanian, and this month raised a Series A round of $8.5 million from investors including Sequoia Capital and SV Angel.

Mehta recognizes that a lot of other companies are putting their resources into same-day delivery programs, including Amazon, Wal-mart, and eBay, but he hasn’t seen much competition in the grocery space. Though Instacart could eventually branch out to delivering other goods, for now he feels like they’re a safe bet; everyone needs to eat and get their groceries frequently, but consumers don’t order goods like TVs very often. “That’s why we think we have a fundamental edge over companies like Amazon,” he says.